Category: Qualified Longevity Annuity Contract (QLAC)

Trusts from A to Z

Many folks assume that trust funds are only for the rich, however, people in all types of economic circumstances may see a benefit from them. A trust fund is a special legal arrangement that lets a benefactor arrange for certain assets to go to someone else. 11-04-16

Motley Fool’s recent article, “Navigating the World of Trust Funds: Your Quick Guide,” explains that there are various types of trust funds that can serve as useful estate-planning tools. Here’s a rundown of revocable or irrevocable trusts, credit shelter trusts, generation-skipping trusts, and qualified personal-residence trusts.

Revocable trusts. Also known as a revocable living trust, this trust lets you manage your trust during your lifetime. In creating the trust, you can name yourself as the trustee in charge of overseeing its assets. This lets you move assets in and out of the trust as you want or even terminate the trust if your circumstances change. There’s a good deal of flexibility, and a major benefit is that they have the ability to bypass probate. Depending on where you live, probate can be lengthy and expensive. A revocable trust can also reduce the estate tax burden on your beneficiaries.

Irrevocable trusts. This is the opposite of a revocable trust. It can't be altered or terminated without the consent of the trustee and the trust's beneficiaries (and perhaps a judge). When you place assets into an irrevocable trust, you may no longer have any rights to them. The big benefit is saving money on estate taxes. When you transfer assets into an irrevocable trust, they're no longer yours and are excluded from your estate's value for tax purposes. Also, trust assets may be more difficult to access by creditors or anyone who initiates a lawsuit against you. And if you hold assets that you think will really appreciate over time, you can transfer those assets into the trust to remove them from your taxable estate and ensure that any future appreciation on them isn't subject to estate taxes. It’s a serious long-term commitment and may be a good option if you have a larger estate.

Credit shelter trusts. This trust can help wealthy married couples lower their estate taxes by maximizing federal and state exemptions. If you set up a credit shelter trust, the assets in that trust will be transferred to your beneficiaries upon your death, but your spouse can keep his or her rights to the assets contained in the trust for the rest of his or her life. Ultimately, however, those assets won't be counted as part of your spouse's estate. This helps your family take advantage of available tax exemptions. With portability, this trust may not be as useful as it once was. Portability lets the first spouse who dies transfer his or her assets along with the "unused" estate tax exclusion amount to the surviving spouse, who can then apply this enhanced exclusion amount in his or her own estate.

Generation-skipping trusts. This trust is established for the benefit of your grandchildren, as opposed to your children. These trusts are used to avoid estate taxes: if your children inherit your estate directly, then the value of your estate is added to the value of their estate and this could potentially trigger estate taxes when they die. By skipping your children’s generation you may be able to transfer more assets to your family than to the IRS over the long term. The generation-skipping trust is subject to taxes, but it can be structured to reduce estate taxes, allowing affluent families to preserve their wealth for future generations. A big advantage of generation-skipping trusts is that they can help avoid generation-skipping transfer tax.

Qualified personal residence trusts. This trust lets you leave your home to your beneficiaries and decrease your estate taxes. You can transfer your property by deed into the trust while retaining the right to live there for a certain period of time. Once that’s over, your beneficiaries can inherit your home, paying taxes on the value of the home at the time of the deed transfer. A qualified personal residence trust can be useful in locking in a lower value for gift tax purposes. And you can claim a lower value of the gift for your beneficiaries based on their delay in actually receiving the property. But if you die while living in your home, it’ll count as part of your estate and be taxed according to its value at that time.

Trust funds can be a big element in your estate-planning strategy, so talk with a qualified trust attorney to see which type of trust is best for you.

Reference: Motley Fool (Sept. 18, 2016) “Navigating the World of Trust Funds: Your Quick Guide”

Smart Strategies for Social Security Benefits Taxes

The issue of whether your Social Security benefits are taxed is based on your "provisional income." This is your adjusted gross income—not counting Social Security benefits—plus nontaxable interest and half of your Social Security benefits. 10-31-16

Kiplinger’s recent article, “5 Ways to Avoid Taxes on Your Social Security Benefits,” explains that if it's below $25,000 and you file taxes as single or head of household (or less than $32,000 if you file a joint return), you won't owe taxes on your benefits. So if your provisional income is between $25,000 and $34,000 and you're single, or between $32,000 and $44,000 if you file jointly, it means that up to 50% of your benefits may be taxable. If your provisional income is more than $34,000 for a single or more than $44,000 if married filing jointly, up to 85% of your Social Security benefits may be taxable.

Here are a few strategies that can help you keep your income below the thresholds and decrease the part of your benefits subject to tax.

Donate your RMD to charity. Those who are 70½ or older can give up to $100,000 annually to charity from their IRAs tax-free. This gift counts as the required minimum distribution (RMD) but isn’t included in adjusted gross income.

Purchase a QLAC. You can invest up to $125,000 from your IRA or 401(k) in a special version of a deferred-income annuity known as a Qualified Longevity Annuity Contract (QLAC). Money in a QLAC isn’t considered in calculating your RMD. As a result, you can reduce the size of your RMD, lower your income and decrease your tax bill. Payouts don’t start for several years. It can be as late as age 85 when they’ll be included in your taxable income.

Withdraw money from tax-free Roth IRAs. Tax-free withdrawals from a Roth IRA or Roth 401(k) aren’t calculated as part of your AGI. If you roll over money from a traditional IRA or 401(k) to a Roth prior to receiving Social Security benefits, you can avoid taxes later in retirement. You are required to pay income taxes in the year of the conversion, but you can use the funds tax-free after that.

Review income investments. Structure your portfolio to minimize the income it generates when that income is being reinvested because you're recognizing income you don't need. This means taxes you don't want to pay! Consider a growth-oriented portfolio and remember that nontaxable interest, like interest on municipal bonds, is included when calculating the taxes on your Social Security benefits.

Examine your tax moves. If your income is well over the $44,000 threshold, there is probably not much you can do to get below that level. But don't focus only on Social Security taxes—look at overall tax-efficiency.

Reference: Kiplinger (July 2016) “5 Ways to Avoid Taxes on Your Social Security Benefits”